Oil Market Review

Monthly Review

September 2017

In August, Brent North Sea quality opened at $51.52/b and closed at $52.85/b, while West Texas Intermediate price reduced, moving from $49.03/b to $47.11/b.

During the first part of the month, both the European and Asian benchmark and the American reference were quite stable. In particular, on August 9th, Brent quoted at $52.76/b because the futures related to this quality returned in backwardation, while WTI reached its monthly high at $49.81/b.

Subsequently, oil prices diminished and, on August 16th, both qualities touched their monthly low, quoting at $50.34/b and at $46.79/b as OPEC compliance to November 2016 agreement fell to 75% and U.S. oil production overcame 9,500,002 b/d for the first time since July 2015. Moreover, this latter data explain to us while WTI bearish trend was stronger than Brent tendency.

During the last ten days of August, whereas Brent prices raised thanks to the dollar depreciation over the euro – 1.2048 €/$ on August 29th, the lowest since January 2015 – WTI did not significantly recover as a consequence of Hurricane Harvey, which hit Texas. In fact, refinery outages mean a steep drop in oil demand (-5% in comparison with the 3rd week of August).

In our previous report, we wrote that if the price of Brent – returned to backwardation at the end of July – had continued in the next weeks, it would have contributed to opening a new scenario for OPEC and non-OPEC producers. On one side, the strong demand – estimated to grow by 1,500,000 b/d in 2017 – confirms our thesis but, on the other side, OPEC and non-OPEC producers must take care of their last arrangement since the American fracking producers, despite the persistence of some clouds on the horizon, are still increasing their output (9.530.000 b/d on August 25th).

by
Demostenes Floros

August 2017

In July, oil prices increased. In particular, Brent North Sea quality opened at $49.58/b and closed at $52.68/b, while West Texas Intermediate opened at $47.19/b and closed at $50.20/b. On July 7th, both the European and Asian benchmark and the American reference reached their monthly low, respectively pricing at $47.00/b and at $44.47/b as official data showed that U.S. drillers boosted production by 1% during the last week of June. In fact, after the U.S. oil extractions temporarily diminishing by 100,000 b/d to 9,250,000 b/d, they reached again 9,338,000 b/d. Subsequently, barrel prices started to rise and, on June 19th, Brent traded at $49.70/b while WTI at $47.31/b. Three reasons can explain this bullish trend:

1. On June 13th, according to the data provided by the Energy Information Administration, U.S. refineries worked at 94.5% of their maximum capacity and the American crude stocks decreased by 7,600,000 b/d, the highest fall since September 2016. Simultaneously, U.S. gasoline inventories dropped by 1,600,000 b/d;

2. The dollar depreciated, both over the euro, and towards a basket of global currencies;

3. In the II quarter of 2017, China’s real Gross Domestic Product grew by 6.9% in comparison with the same period of 2016. This positive tendency was faster than expected and in line with the I quarter’s growth. The Chinese government is aiming to rise its GDP to around 6.5% in 2017.

After a new slight fall in barrel prices of approximately $2/b – probably, reconnected to the speculation – verified within 19th/21th of July, oil prices increased during the last week of the month in the wake of the decisions taken during the St. Petersburg meeting on July 24th. In particular:

1. Saudi Arabia decided to cut its oil exports to 6,600,000 in August, 1,000,000 b/d less in comparison with the same period of 2016, while United Arab Emirates will slash their September oil deliveries by 10%;

2. Nigeria, which is exempted by the 2016 November agreement, promised to collaborate with the cuts decided by the other OPEC Member as soon as it reaches the output of 1,800,000 b/d. At the moment, Nigeria’s production is slightly below this level;

3. By common consent, the Russian Energy Minister, Aleksander Novak, and his Saudi colleague, Khalid al-Falih, expressed their support to an eventual extension of the 2016 November agreement. At the moment, the deal will end on March 31st 2018;

4.The increase in U.S. oil and gas rigs is slowing down while U.S. inventories are showing massive drawdowns (10% less from their March peaks).

To conclude, if policy makers and investors want to look deeper into the analysis of the barrel trend, which happened during the last months, they have also to take into account the statements made on July 22nd by ENI CEO, Claudio Descalzi, who said, “There is a great deal of speculation going on. If, for instance, the price of crude oil goes up to 52 dollars, regardless of inventory levels, then everyone sells straightaway because they have no confidence in what’s going to happen. If the price drops back to 46 dollars, then they buy it back. That way, there are speculators making hundreds of millions, perhaps billions, of dollars every day.” If the price of Brent – returned to backwardation at the end of the month – will it continue in the next weeks and contribute to opening a new scenario for OPEC and non-OPEC producers?

by
Demostenes Floros

July 2017

In June, oil prices decreased. In particular, Brent North Sea quality opened at $50.25/b and closed at $47.90/b, while West Texas Intermediate opened at $48.18/b and closed at $46.20/b. At the time of writing, Brent crude was trading at $48.57/b, while WTI was quoting at $45.90/b.

On June 21st, both the European and Asian benchmark and the American reference reached their 8-month low, respectively pricing $44.79/b and $42.25/b due to the following reasons:

1. During the first part of the month, global oil inventories (OSCE area) exceeded again 3 billion barrels. Especially, after two months during which U.S. oil stockpiles decreased by 25.600.000 barrels, they unexpectedly rose; 2. Both Nigeria, and Libya – which are exempted by the November 2016 agreement – increased their extractions, adding into the market 375,000 b/d; 3. On June 16th, the U.S. oil production has reached 9,350,000 b/d for the first time since August 2015 thanks to the fracking activity.

The light recovery verified during the last week of June was because in the U.S. crude stocks decreased by 2,500,000 barrels and the gasoline inventories by 578,000 barrels according to the Energy Information Administration. Moreover, U.S. oil extractions diminished by 100.000 b/d to 9,250,000 b/d.

To conclude, if barrel prices fell to their lowest level since November 2016 in spite of the supply cuts by OPEC and Russia and the geopolitical tensions in the Middle East between Qatar and the other Petromonarchies, the main reason is that the real global economic activity is slowdowning. As chance would have it, U.S. consumption trend, which determine 2/3 of its GDP – is weak.

by
Demostenes Floros

June 2017

It was a volatile month of trading in May for the oil traders as the prices weakened during the early part of the month, then strengthened in the lead up to the OPEC meeting and then weakened again towards the end of the month as the OPEC once again sought to extinguish any sort of hopes that the market had, over the increasing oil prices. All of this action happened within one month and to some investors and traders, this should come as a relief after the stalemate that we had seen in the first couple of months of this year when the oil prices ranged and consolidated without moving much in any specific direction. Last month was all about the OPEC meeting that came about in the third week of the month. The oil prices had a deep fall during the first week of the month as the production and inventory data continued to show a buildup and this was not in the plans of the OPEC and the other producers who were hoping to see their production cut have an effect on the supply which would in turn help to keep pushing the oil prices higher and higher. None of this happened during the first week of the month of May and the oil buyers were scraping the bottom at the $44 region. But better news was to follow as reports began to flow in saying that the OPEC members are likely to agree on a much longer and a much deeper production cut in their meeting towards the middle of the month. More and more such reports began to emerge and Saudi Arabia and Russia also added fuel to the fire by commenting things similar to that effect and also not denying any such report. This increased the market expectations and the bulls showed their thumbs up for these reports by indulging in a lot of buying. As is usual for the markets, the traders clearly overran the reports and the actual meeting and by the time the meeting began in the third week of May, the oil prices had jumped from the depths of $44 to push through $50 and then make its way as far high as the $52 region. It was a clear case of over enthusiasm from the markets and in such cases, it ends up in a lot of tears and that’s what we say. The meeting did go through as planned but the announcements following the meeting were anywhere near as planned. The OPEC members announced an extension of the production cut deal to 9 months which would take the deal through to the end of the year but they did not announce any extra cuts of any sort. This largely disappointed the markets and the oil contracts began to sell off. This pushed the oil prices through the important psychological mark of $50 and the prices ended below that figure for the month of May. We also began to have reports saying that the Russians were comfortable with low oil prices and this basically left the oil prices at the mercy of the incoming production and inventory data. Technically, the break below the $50 mark is an important event which shows that the bears are dominating the scene as far as oil prices are concerned. It is likely to take a lot of effort from the bulls to break back through this region and that is something that is unlikely to happen in the short term as we saw multiple attempts to break through that region, end up in failure during the end of the month of May. We can expect the supports to come in at around the $47.5 region and then the $44 region and if the oil prices do go below even this, then there is not much to save it. Looking ahead to the month of June, we expect the production and the inventory data to dominate how the prices move during the course of the month and with these not showing any signs of thawing; the outlook for oil prices continues to be bearish. The production from Libya continues to be very high and the inventory data from the US also remains high and a combination of these is likely to keep the oil prices under pressure despite the production cut deal continuing through the month of June. The latest developments in the Middle East between Qatar and Saudi Arabia and company is likely to help to keep the oil prices well bid but it remains to be seen whether just this development would be enough to keep it afloat for the rest of the month.

by
FXEmpire

May 2017

Crude oil prices started April in the midst of a strong uptrend that continued into mid-month. The move ended after with a dramatic technical reversal at the end of six day winning streak. The rally was primarily driven by aggressive hedge and commodity fund buying as money managers continued to increase bullish bets on a crude oil short-fall. The catalyst behind the buying was growing compliance with the OPEC-led plan to cut production, trim the global supply and stabilize prices. Traders primarily ignored signs of increasing U.S. production as rumors began to surface that OPEC and other non-OPEC producers were strongly considering an extension of the program to limit output beyond the June deadline. Crude oil began easing from its high at $54.14 on April 12 as rising U.S. shale oil production offset concerns over geopolitical tensions in the Middle East and output cuts being made to support prices. U.S. crude inventories also touched record highs at both the U.S. storage hub at Cushing, Oklahoma and in the U.S. Gulf Coast. In addition, the U.S. rig count continued to increase throughout April, setting a bearish tone for increased production into the future. Heaving selling on April 19 signaled massive hedge and commodity fund liquidation with the market dropping nearly 4% in one session. This also set in motion a sell-off that eventually drove prices to $49.20 before settling the month at $49.33, down $1.74 for the month or -3.41%.

by
FXEmpire

April 2017

March has turned out to be a volatile month for the oil prices as they crashed during the early part of the month but they managed to turn it around and were able to recover a part of the move down during the last week of the month. The oil prices had been spending a couple of months in the range between $53 and $55 and it was getting to a stage where the traders were beginning to lose interest in trading oil as it was stuck in the highs of the range and refused to move in either direction for several weeks. It was during the month of March that the market began to slowly realise the scale of data that was coming in and realised that the incoming inventory and production data did not show as much a drop as was expected when the agreement between the oil producers was sealed. They had expected the production and the inventory to slow down, gradually pushing the prices higher and higher but with the North American producers increasing the production, the oil supply did not get the drop that it was supposed to. This finally dawned on the oil traders who sold off oil in the early part of March. The sell off was only for a couple of days but that was enough to push down the oil prices by around 12% and through the important figure of $50. This was a huge blow for the bulls and for 2 weeks, they could not break back through $50 cleanly and it was only towards the end of the month, that the oil inventory began to show signs of drying up, the oil producers seemed to be confident of continuing their deal beyond the middle of the year and the Libyan oil production also tailed off and all these events were enough to push the oil prices above $50 where it stayed to close the month. Looking ahead to April, we believe that the oil prices have come out of the rut below $50 and are here to stay above it for good. This is what the bulls would also hope for and it is important to watch out for the production and inventory data to see for signs of continuing fall or for signs of them picking up and these are the data that are likely to guide the oil prices in the coming month. We believe that the prices would range between $50 and $55 in the coming month if the incoming data is as expected. Else, the oil prices are likely to fall below $50 again and if that happens, the bulls would be finding it very difficult to break back above the important figure again.

by
FXEmpire

March 2017

U.S. West Texas Intermediate crude oil futures finished February slightly higher. The range was extremely tight as rising U.S. production continued to offset increased compliance with OPEC’s planned output cuts. April WTI crude oil finished at $54.01, up $0.59 or +1.10%. The range for the month was an extremely tight $3.17. U.S. production continued to rise last month with inventory increasing every week to end the month at a record 520.2 million barrels. The number of rigs drilling for oil also continued to increase, ending February at 602 rigs, up about 36 rigs. According to Reuters, OPEC reduced its oil output for a second month in February. Its data showed that the cartel boosted strong compliance to around 94 percent. Saudi Arabia reduced production by more than it pledged. Russia has cut production by a third of its pledge. Finally, government data showed hedge funds hold a record net long position in crude oil futures and options.

by
FXEmpire

February 2017

The month of January saw the beginning of the implementation of the OPEC deal between the oil producers to cut oil production as a means of increasing the falling oil prices. This was agreed among oil producers at the OPEC meeting last November, and we saw the oil prices consolidate and range for the whole of this month. Despite initial doubts, the implementation has been going on as per plan and the OPEC members have expressed happiness about it but the oil prices have not been able to breakout from its range as there are concerns about growing oil reserves from the North American countries that are not part of the pact. Though the OPEC and non-OPEC members have been diligently implementing the deal, the incoming data does not yet show any major changes in the reserves or the supply of oil and unless this starts showing up in the data, we are unlikely to see oil prices move higher. The ultimate target for the oil price would be around $60 and it is this average price that the producers would also be aiming for. But these prices would be difficult to achieve if the North American producers continue to pump large amounts of oil into the system as it then affects the overall supply and demand ratio and hence, oil prices would not be able to rise further. Looking ahead to February, the oil bulls would be hoping that the deal continues to hold in the midst of all the political tensions and would also expect the incoming data to show the contraction in supply so that the oil prices can break out of the topside of their range and towards the short term target of $55 and medium term target of $60.

by
FXEmpire

January 2017

Crude oil posted a solid gain in December, driven by late November’s decision by OPEC to cut production starting January 1. There have been many doubts throughout the year as to whether the cartel could form a united front to deliver such a deal, but from the market’s performance this month, it looks as if investors are going to give them a chance to succeed. The initial plan called for OPEC to reduce production starting in January by 1.2 million barrels per day, or over 3 percent, to 32.5 million bpd. Top exporter Saudi Arabia said it would cut as much as 486,000 bpd. The news fueled a rally by U.S. West Texas Intermediate Crude Oil from $46.62 to $54.26. After a short-term setback to $51.80, the market spiked higher to $56.24 on December 12 as investors reacted to the news that producers from outside OPEC agreed to reduce output by 558,000 bpd. Russia pledged to cut the most among the non-OPEC countries at 300,000 bpd. The buying stalled after the jump to $56.24 as investors started to express doubts that the plan would work fast enough to reduce supply and stabilize prices. Additionally, investors became concerned over rising U.S. oil output and total supply as producers continued to put more oil rigs to work. Going into the end of the month, prices had become rangebound as several countries told customers of the upcoming supply cuts and Libya ramped up production. As of the close on December 23, March WTI Crude Oil was up 5.29% for the month.

by
FXEmpire

December 2016

It was quite a month for January West Texas Intermediate Crude Oil futures in November. The markets were on a rollercoaster ride through the month, influenced by OPEC’s ability to carve out an agreement to cut and cap production. This lead the WTI to an intra-month low of $43.32 before November 30th surprise announcement by OPEC, carving out a 1.2m bpd cut in production from January 2017. This represents the Cartel’s first cut since 2008 and the first joint OPEC – Russia joint agreement to cut production since 2001. Heading into the Vienna meeting, the rhetoric was in full swing as the Saudis intimated an unwillingness to cut production if all Cartel members didn’t follow suit, though in the eleventh hour it was the Saudis themselves who took the biggest hit, agreeing to cut production by 0.5m bpd. Russia followed on with an agreement to cut production by 0.3m bpd, accounting for half of the 0.6m bpd cut agreed by non-OPEC members, though Russia ultimately will cut production by the 0.3m bpd through the first half of next year. WTI and Brent rallied 9.31% and 8.82% respectively on Wednesday, off the back of the announcement with the markets pushing the WTI to a monthly 5.5% rise leading to a closing price of $49.44. It was not a smooth ride after all, with Indonesia threatening to suspend its membership, refusing to cut production by 37k bpd, after having only re-joined earlier in the year. As the dust settles, the markets will likely begin to consider how U.S shale producers will respond to the agreement as the U.S active rig count has risen from 441 to 474 through the month.

by
FXEmpire

November 2016

October has seen a continuous and steady rise all through the month in the oil prices which is just a continuation of the rise generated due to the decrease in the supply of oil from the OPEC producers based on the deal that they reached on September 28. Credit goes to them in that they have successfully managed to cut the oil production without any major diplomatic gaffes (though Iraq has refused to cut the production) and this reduction has helped oil price to move from $48.3 to as high as $52.3 during the course of the month.Towards the end of the month, we see a correction in the oil prices due to general USD strength and also due to oil inventory data which continue to remain high despite the production cuts. Oil prices have also met a wall in the region between $52 and $53 which has proved to be a tough nut to crack even during periods of USD weakness and growth in commodity prices. We did see multiple attempts to break this price range but all have been unsuccessful so far.The coming month would be crucial as the OPEC producers meet again in November to discuss further progress in the production cuts and it is expected that they would announce the specifics of production cuts including the amount and also the countries that would be doing the cuts as such. Once the details of the deal emerge and if they do successfully strike out a deal between the producers, we could see the next bullish run in the oil prices which may be enough to break the wall and head towards $55 and beyond.

by
FXEmpire

October 2016

November West Texas Intermediate Crude Oil futures went on a wild ride in September, posting a total of five major price swings on the daily chart and trading above and below the previous month’s close at $45.31 a total of six times before finally clearing for what is expected to be the last time on September 28.The two-sided trade highlighted in September allowed volatility to reach its highest level since April 2016 when OPEC was meeting in Doha to decide on production cuts. This month’s volatility was fueled by a similar event, but this time the talks were informal and the event took place in Algiers.Throughout September, investors were playing both sides of the market because of uncertainty over whether OPEC and the other major non-OPEC members would be able to strike a deal to either freeze production or curb output. The bullish traders had their wish granted on September 28 just as the informal talks were ending when in a surprise move, OPEC reached a tentative deal to reduce crude output levels. The agreement calls for a reduction of 700,000 barrels per day to 32.5 million barrels per day. The details of the deal still have to be worked out and this is likely to take place when OPEC holds its formal production meeting in November.The agreement to curb production was especially noteworthy because it marked the first time the group has been able to agree on production cuts since 2008.

by
FXEmpire

September 2016

October Crude Oil began August under pressure as lingering supply concerns and weakening demand issues continued into the new month. After finishing July at $42.33, sellers drove the market into its lowest level in nearly 4 months. Profit-takers stopped the price slide on August 3 after crude reached $39.96, its weakest price since April 5. The spike to the downside on that day was a result of a bearish U.S. Energy Information Administration’s (EIA) weekly petroleum status report that showed commercial crude inventories increased to a historically high level for this time of year, according to the EIA. After building a record short position, short-covering by hedge fund managers helped the initial rally gain traction. The rally began to gain strength after a report that OPEC and non-OPEC countries would take another stab at trying to reel in production. Helping to drive prices into $47.64 or up 12.54% for the month was the news that OPEC had agreed to hold an ''informal meeting'' on the sidelines of the 15th International Energy Forum in Algeria on September 26 to September 28. October Natural Gas futures posted a volatile session in August, recovering from a seasonally-driven break into $2.580 before reversing course to finish nearly unchanged for the month at $2.913. The catalyst behind the rally was concerns that tropical storms in the Gulf of Mexico would eventually cause production issues.